Small business CGT concession eligibility to tighten

The government announced last year that it intended to tighten the eligibility factors for the CGT concessions that are generally available to small businesses. The CGT concessions are important for qualifying businesses in that they can defer, reduce or remove liability to CGT.

Specifically, the proposed amendments (which have been released in exposure draft form) will limit the current CGT concessions to assets that are used by a small business or ownership interests in a small business.

Dr Mark Pizzacalla, partner, business services, at BDO Australia, says: “The new small business CGT concession rules are an important step in making sure that such concessions can only be accessed by taxpayers for which they were originally intended.”

The amendments include additional basic conditions that must be satisfied for a business to apply the CGT concessions to a capital gain arising in relation to a share in a company or an interest in a trust (labelled the “object entity”).

Broadly, the conditions require that:

if the taxpayer does not satisfy the maximum net asset value test, the relevant CGT small business entity must have carried on a business just prior to the CGT event;

the object entity must have carried on a business just prior to the CGT event;

the object entity must either be a CGT small business entity or satisfy the maximum net asset value test (applying a modified rule about when entities are “connected with” other entities), and

the share or interest must satisfy a modified active asset test that looks through shares and interests in trusts to the activities and assets of the underlying entities.

The above webpage also provides a link to explanatory material.

“Obviously, whenever new rules are introduced, this will inevitably mean that there will be a learning curve for practitioners to get up to speed, and so caution should be exercised when applying the new rules,” says BDO’s Mark Pizzacalla. “Some commentators have suggested that the rules may be too widely drafted — this aspect will become clearer once the rules start being applied in practice.”

Labelling the change an integrity measure (the word is even used in the email address – see below), the government says: “This will prevent the concessions applying to non-business assets owned by an entity that carries on a small business. It will also prevent structuring so that ownership interests in larger businesses pass the eligibility tests.”

Under the proposed amendments, the measure would be backdated to apply from 1 July 2017. The changes do not touch the current definition of a small business entity as it applies to the CGT concessions. The existing tests of group turnover of less than $2 million or group assets under $6 million still apply.

The government’s announcement on business assets also mentions the extended $20,000 instant asset write-off, but only to reiterate that this measure is due to expire from 30 June 2018. Tax & Super Australia’s pre-budget submission seeks to have this made permanent, among other recommendations.

In regard to the CGT concessions, stakeholders and other interested parties have until 28 February to make their views known. Submissions can be emailed to SBCGTintegrity@treasury.gov.au